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Managing Your Retirement Tax Bracket through Roth IRA Conversions Thumbnail

Managing Your Retirement Tax Bracket through Roth IRA Conversions

By Wayne Wagner Jr., ChFC

In our recent client survey, many of you asked about Roth IRA conversions during retirement. It's an important question, and it's one that can have a substantial impact on your ability to manage your tax liability during retirement. Today, we'll tackle how that strategy is highly impactful for strategic planning throughout retirement.

Tax Differences Between IRA and Roth IRA

Many of you may already know the tax differences between an IRA and a Roth IRA.

  • IRA's are funded with pre-tax contributions, with the taxes being applied upon your withdraw.
  • Roth IRA's are funded with post-tax money, leaving it free and clear to withdraw during retirement without a tax liability.

Positioning Your Money for Lower Tax Brackets

The concept of converting into a Roth IRA during your years of retirement is best utilized using the specific numbers of $329,000 (married couples filing jointly) and $169,000 (single tax payers). We use those numbers because that's the top end of the 24% tax bracket for taxpayers.

When you are retired and you stop earning income, we're trying to manage you into that 24% tax bracket.

Many of our clients are in higher tax brackets than that, especially in their top earning years just prior to retirement. As a result, that's when you have the maximum ability to save money and invest money. That's where your IRA assets largely grow and build in value, specifically in that last 5 to 10 years before retirement.

Once you transition into retirement, you do not have as much earned income (or no earned income). Now is the time to utilize that tax bracket positioning.

Understanding How Roth Conversions Impact Your Tax Liabilities

How do we do this practically is when we enter the fourth quarter, we look at what we think your taxable income is going to be for the year. Then we do what's called a partial Roth conversion, where we take a portion of your IRA, and we convert it into a Roth IRA up to the top of that 24% income tax bracket.

What we are trying to avoid is pushing you into those higher brackets – 32%, 35%, and so forth. We don't want you to pay an onerous amount of the taxes. And remember, when we do this conversion, you pay the taxes on the amount you're converting. We need to pay for that conversion with dollars from another source.

As an example, if we converted a million bucks from an IRA into a Roth IRA:

  1. That pushes you into a higher tax bracket
  2. We have to come up with all of those taxes from other sources

The problem is that for most of us, there's more IRA money or retirement dollars than there is non-retirement dollars. It becomes challenging, both because you're paying too much in taxes as well as navigating liquidity and access to capital to actually pay the taxes.

Our priority as our clients' financial advisor is to help them navigate their Roth IRA conversions to minimize their tax liability.

Have Questions About Your Roth IRA Conversions?

If your upcoming tax liability is something you want more financial confidence on, let's have a conversation. You may be a current client of ours looking to understand your plan better. You may be new to Vizionary Wealth, but nonetheless, we're here to help answer any questions you may have about your financial trajectory.

Schedule a Call with Wayne